There's no single answer, but average is 17 percent, experts say

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We invited Gut Check America readers to submit their questions about the "middle class squeeze." We picked the best and sent them to our blue-ribbon panel of economic experts -- Arthur B. Laffer, Bob McTeer and Robert B. Reich -- to get their opinions. Check back each day of the series for more questions and answers.

QUESTION: What percentage of middle-class Americans' wages goes toward health coverage? Even though I received a raise at work, my take home pay is less because of increased insurance costs paid by me.
-- Anonymous, Benoit, Ohio

On average, about 17 percent of middle-class wages go to health coverage. But the average hides a wide variation. Workers who are older, who are less skilled, or whose employers don't provide health insurance or require them to pay a larger co-payment or deductible, pay more. Younger and more highly-skilled workers, whose employers bear a larger share of the cost, pay much less.

Greetings to a fellow Buckeye. The answer to your question is difficult to quantify due to a multitude of factors that go into the calculation, including the definition of middle-class; whether the individual has health insurance; if so, whether insurance is provided by the employer, the government or the individual; the plan itself; the health of the individual; etc. Taking all of that into account, I hesitate to estimate what percentage of wages go toward health insurance, but I think it is fair to say that the number has risen over time as the increase in the price of medical care has been outpacing inflation and the products and services available to the elderly and sick have become a lot better and more abundant.

What is easier to determine than the percentage of middle-class wages going to health care is what is causing runaway health care costs. The problem is that government intervention in health care violates virtually every sound law of economics: We impose price controls, we make the services essentially “free” to consumers through over-insurance, we regulate entry and exit into the market, we have forced patients into managed care programs that are socialistic institutions, and we have government subsidies paying for more and more of the costs. The pricing system that in every other industry relies on Adam Smith’s “invisible hand” of the market place to equilibrate supply and demand is simply inoperative in the health care industry.

Furthermore, to call what we have today “health insurance” is really a misnomer. Most Americans have prepaid health care, not “insurance.” Insurance is supposed to be for rare major expenditures in order to spread risks among large populations. But most Americans’ insurance coverage has low deductibles and covers minor rather than major expenditures. That is precisely the opposite of how insurance should be provided.

Let’s be clear, though. Despite these inefficiencies in our health care system, it still offers the best quality of care in the world. Yet under a more rational health care delivery and payment system, Americans would be paying a lot more of their costs “out of pocket” and a lot less through government or private insurance, leading to the same great medical care at a lower total cost. Medical savings accounts are one way to put more competition and price sensitivity into the equation.

Tell me about it. I’m not a health-care or health- insurance expert as are several of my colleagues at the National Center for Policy Analysis, including its founder and president, John Goodman. According to the Bureau of Labor Statistics, nearly 8 percent of employee compensation is in the form of health benefits. That is the percentage of employee compensation employers pay. If you add the employee portion of insurance premiums, co-pays and non-covered health care expenses to that, the total would likely be close to 10 percent.

While recent increases in the employee share seem large to us, I’m told that surveys show that employers still pay about 75 percent of the premiums in employer-based plans. Of course that doesn’t mean that employers bear 75 percent of the “burden.” The incidence still falls mainly on employees since the employers’ cost is the same whether we get our compensation in the form of wages or benefits. Employer-paid health benefits have been a good deal for employees in the past because they haven’t been taxable as wages would have been. That advantage has been eroding in recent years as health care costs, and thus insurance premiums, have risen faster than wages or the costs of other goods and services, and forced employers to shift some of the rising costs to employees.

An unwinding of the employer-based system seems bad to those of us affected, but it may help the transition to a more rational system in the future since it inhibits needed portability of insurance. Perhaps even more important, one of the main reasons the cost of health care has risen so rapidly is our system of third party payment, which makes health care at the margin seem free to its consumers. Moral hazard issues usually arise when purchases and payment are made by two different people. Somehow, health care reform must include putting the consumer in charge of both sides of the transaction.

How does weak dollar affect us?
QUESTION: The U.S. dollar has fallen in value around 20 to 30 percent vs. the euro and Canadian dollar. Since the vast majority of our goods are imported, doesn't that mean that inflation has truly risen 20 to 30 percent over the same time period regardless of the "'politically biased" inflation numbers released by our government?
— Bill, Albany, N.Y.

Not quite. While the percentage would be greater for goods only (14 percent), the percentage of goods and services that are imported is about 17 percent — far from 100 percent. Also, producing accurate inflation statistics is inherently difficult, but I don’t believe or shortcomings result from political bias, even though most of those who produce the numbers probably have politics different from mine, I’ve met many government “bureaucrats” over the years; they value their integrity above all else, and protect it jealously.

Your basic point that a declining currency is inflationary is correct, however. So is the point that inflation may be the cause of the decline as well. Sometimes it doesn’t matter which came first, the chicken or the egg, when we know which comes next.

A declining currency is generally not good, but under certain circumstances it may be the least-worst alternative. For example, if a large current account deficit puts downward pressure on the domestic currency, which is successfully pegged, the required adjustment is shifted to the broader economy. Correction of the deficit requires a reduction in domestic absorption of goods and services relative to domestic production. This requires a change in price signals and incentives. If the adjustment doesn’t come through a change in the exchange rate it will come through deflation or recession in the deficit country and inflation in the surplus country. It may be better for a decline in the currency to reduce the purchasing power of each of us a little bit than for a recession to place the full burden of adjustment on those who lose their jobs.

Adjustment is inevitable. And, as Ben Stein’s father, Herb Stein, is alleged to have said: “If something is inevitable, it will happen.”

He probably should have added, “sooner or later,” since the adjustment in our current account deficit has been a long time coming. If adjustment is inevitable, the question is whether it is best done through the exchange rate or through changes in internal economies.

You're correct that, as the dollar falls, everything we import costs more. But there's so much competition among retailers that they've been reluctant to raise prices. Instead, they've sought other ways to cut costs, and thereby keep prices as low as possible — sometimes by substituting software and automated machinery for employees, sometimes by cutting wages or benefits of employees, sometimes by finding new means of delivering goods and services more efficiently.

It is true that the real value of the dollar has been falling in the international exchange since its value peaked in 2002. You have accurately pointed out that the fall in value of the dollar translates into higher dollar prices of imported goods, and the fall in the value of the dollar (along with the huge global boom) has also contributed to the run-up in energy prices.

That being said, unless you purchased 100 percent of your goods and services from abroad, you would not face a 30 percent increase in prices for a 30 percent decrease in the value of the dollar. Furthermore, increases in prices of imported goods are taken into account in the inflation numbers. Each inflation number (whether you are looking at the CPI, PPI, GDP deflator, or what-have-you) is carefully measured based upon the definition of the statistic, and goods from other countries are included in the calculations. The measurement does not change by administration, so while each has its own potential to be upwardly or downwardly biased based upon how it is measured, I don’t believe that any of them are politically biased per se. If anything, research has demonstrated that the CPI Index may actually overstate inflation due to a failure to account for quality improvements, among other reasons.

Technicalities aside, I believe that the Federal Reserve has been doing such a good job in terms of monetary policy that the only inflation we have had in the United States over the past few years has been due to the weak value of the dollar and temporarily high energy prices.

Fortunately, the Senate thus far has been unable to convince China to devalue its currency, or else inflation would have risen much more. With the yuan pegged to the dollar, our weak dollar does not affect the price of goods traded with China. Remember, without China there is no Walmart, and without Walmart America would be a lot poorer.

Is the 'middle-class squeeze' for real?QUESTION: There is no middle class squeeze. It is an absolute fact that the middle class has it better than ever in our history. Just 35 years ago when I was a child, being middle class meant no multiple cars, color TVs, DVDs/VCRs, cell phones, etc. and few central air conditioners, microwaves and college-bound children. Now the middle class, which has its highest levels of home-ownership as well as all these modern conveniences and most of its children attending college, is being brainwashed into believing that things are bad. Why???
-- Jerry Orzechowicz, Merrillville, In.

You're right — up to a point. As I show in my book "Supercapitalism," American consumers have never had it so good. To take just one example, a color TV that cost $2,227 when color TVs were first introduced in the late 1950s (using the value of the dollar in the year 2000) cost half that by 1967. By 2000, its cost had dropped to just $175, making it affordable to virtually all American families — including over 90 percent of families with incomes under the poverty line. But one's standard of living isn't just about what one can afford. It's also about how hard one has to work, and how secure one feels.

There's the rub. Middle-class families are working much harder these days than they did, say, 30 years ago. The average work week hovers close to 50 hours. Then, it was closer to 40. Moreover, in most families, it now takes two adult workers to earn what's considered a middle class wage; 30 years ago, it usually took one.

Jobs are far less secure than they were 30 years ago. Then, it was fairly common to stay with the same employer for 40 years. Now, most people change jobs every six or seven years, and most of them leave because their job has been terminated.

Finally, median wages, adjusted for inflation, haven't increased all that much. Although the American economy is far larger than it was 30 years ago, most of the gains from growth have gone to the top 1 percent — and even inside the top 1 percent, most of the gains have gone to the very top. Since the 1970s, the nation's richest 1 percent — comprising roughly 1.5 million families in 2004 — have more than doubled their share of total national wealth.

I can’t hazard a guess as to why there is such a malaise in this country about current living conditions, but you are absolutely right that we have never had it better. I’ve never seen an economy that comes even close to the current U.S. economy. I’ve never even read about an economy, modern or ancient, near or far, large or small that can hold a candle to today’s America. While we aren’t perfect, we are the closest thing this old planet has ever created.

Before I dig further into the economy, think about some other great changes over the last half century. Pollution is way down. People are living longer. There is greater racial harmony. The technological advances are not only staggering, but members of the middle class — and even lower class — are able to afford the new technological marvels of the day. In addition, America is about as safe as it has ever been. Even little things, like smoking and driving under the influence, have been on a long downhill slide. Crime and teenage pregnancies are receding. Yes, it’s true, things could be a lot better, but they never have been.

Turning back to the economy, it really has never been any better. Today, the U.S. economy is the only developed economy that is also a growth economy. I believe this is true because of the incredible policies put in place over the last 25 years. Over that time, fiscal policy has been improved dramatically — lower marginal tax rates have encouraged work and investment. Monetary policy has been improved greatly so we now have stable, low inflation translating into much lower interest rates for borrowers. Trade has gotten freer, creating more wealth for America and our trading partners. Finally, economic restrictions and union membership are lower, allowing markets to function more freely.

If you really want to see the affect of these changes, just look at the stock market. From January of 1966 through July of 1982, the average annual compound real rate of return of the S&P 500 was negative 6.1 percent. Really think about that. Due to poor economic policies, the stock market barely appreciated in nominal terms, and returns were actually negative due to the huge increase in the price level. Since pro-growth policies were instituted under President Ronald Reagan, though, the S&P 500 has delivered average annual compound real rate of return of 8.1 percent from July of 1982 through today.

In short, the reason we’re as prosperous as we are is simply due to pro-growth economic policies, including restrained government spending, low rate flat(ish) taxes, sound money, limited regulations, free trade and open borders. Reverse these policies and you will quickly experience the dark side of the supply side. Then people will really have something to complain about.

I basically agree. While many no doubt have reasons to feel squeezed, our middle class, on average, have the labor and time-saving conveniences, toys, gadgets and access to medical care that yesterday’s rich could only envy. Prosperity is a moving target. I tend to define it as making more money than my brothers in law. More seriously, most probably define it as living better than their parents at a comparable stage of life, a test that we continue to meet.

In terms of living standards in general, all income strata have been improving, and these are indeed the good old days, which was the title of a Dallas Fed annual report essay several years ago. We sometimes let money illusion and statistics confuse us, but the questioner is right on in making the comparison in terms of real “stuff.” The productivity and purchasing power of hours worked in this country buy us a standard of living second to no major economy. Some may say we work to hard and long for what we have and don’t have as much leisure as some countries, but that’s our choice and the way we decide to enjoy the fruits of our labor.

Pandering political rhetoric may convince some middle-class people that they are worse off because the incomes of those in higher brackets have risen faster. That’s inevitable given the power of compounding on a larger base and other factors. But given our free enterprise economy we all have a shot at the fast track and the lifestyles that go with it.

Middle-class envy should be tempered by the knowledge that entrepreneurs and business executives drive our economy and employ the rest of us. Let’s not bite the hands that employ and feed us. High income people even help us by their conspicuous consumption. They make a market in the new inventions while they are still too expensive for most of us. Sustaining demand and output until economies of scale and mass production kick in enable us to afford former luxuries that become essential necessities before we know it. The basic point is that we can’t pull ourselves up by pulling others down.

Does the ‘trickle down’ theory really work?
QUESTION: Does the "trickle down" theory really work? When a company does well, do they "share the wealth" with the worker bee, or does that profit tend to all end up in the pockets of management and stock holders? When times are hard, is it the worker that suffers the most, or does management equally bear that burden? What will motivate workers to work more efficiently and be more productive if they don't see any directly measurable change in their paychecks?
— Vicki Wicker, Searcy Ark.

“Trickle-down” economics is actually a term used to critique the policies of supply-side economics, most closely associated in the United States with the policies of President Ronald Reagan. You have correctly characterized the way opponents of supply-side economics view how it operates, but those involved in the movement, which incidentally is sweeping the entire globe, including members of the former Soviet Union, would present the argument much differently.

The main idea of supply-side economics is that you can achieve greater economic growth by properly aligning the incentives to induce people to produce goods and services. These incentives should be at the heart of all government decisions. For instance, lower marginal tax-rates lead to greater real after-tax returns on capital, which will lead to increased investment, productivity and output. Perhaps the most obvious application of incentives relates to welfare: If you pay people who don’t work and tax people who do work, don’t be surprised if some people choose not to work.

Now, if government follows the policy suggestions of supply-side economics, by limiting taxes and spending, maintaining sound monetary policy, making trade as free as possible and keeping government regulations to a minimum, economic theory demonstrates that the economy will grow faster than it otherwise would. In such an environment unemployment is also low, leading to a tighter market for labor and thus higher wages. In fact, theory and research both indicate that in an entrepreneurial society, profits accrue first to laborers — each month only after the workers receive their salary and suppliers are paid will the owner or stockholders receive a dime. Thus only after a business is truly successful will profits begin to accrue to the entrepreneurs and stockholders.

If, on the other hand, the government implements bad policies, economic growth will stall and unemployment will rise. With rising unemployment, many workers will now be unemployed and those that retain their jobs will likely see slower earnings growth. So certainly workers will suffer, yet they will not be alone in their suffering. With slower growth, revenues will fall and not all of the fall will be made up through lower labor costs. Profits will fall as well, translating into lower earnings for management and stockholders. Whether or not the burden is shared equally will vary by economic downturn, industry and company, but certainly everyone loses when the government implements poor economic policies.

I’m glad the questioner asked that familiar question so I can say that I’ve never, ever heard anyone advocate a “trickle down” theory or policy. I’ve never heard anyone say, “We’ll make more money at the top and it will trickle down to the workers.” The “trickle down” label is always a straw man conjured up by one side to pin on the other side in what otherwise might be an intelligent discussion of income distribution. Of course “trickle down” doesn’t work, but nobody ever said it did.

Putting the red herring of trickle down aside, do corporations “share the wealth” with their workers? Yes, but not necessarily out of the goodness of their hearts. They do so because it’s in their own interest to do so in responding to what Adam Smith called the “invisible hand” of a free enterprise system. Smith called attention to the fact that, in a market economy, actions to help ourselves (i.e. maximize profit or income) usually help others as well. Remember, monopoly and fraud aside, those who get really rich in our economy do so by providing a good or service that the public desires and is willing to pay for.

In a free enterprise economy — and most economies are more or less free since the collapse of communism and hard-core socialism — a firm will hire workers, and keep hiring them, as long as the workers add more to the total revenue of the enterprise than they add to total cost. In other words, they hire them as long as it is profitable to do so. Some workers because of their background, education, skills or other advantages may add more to revenue than others; so they will likely earn more. Other workers, with less to offer, will earn less. But all will tend toward incomes that reflect the market value of their contribution to society’s production.

We may not like the outcome of a competitive market place. (My pet peeve is that so many of our richest got that way because they were born with good eye-hand coordination that made them good ball players. But that’s my problem. I’ll get over it.) Some people doing their best may need some help from the rest of us. We may not think the playing field is level enough to be fair, but we should be careful in trying to improve matters. We should strive for equal opportunity and not try to force equal outcomes. We should help people climb the ladder without pulling others down. In our interactive economy, we all benefit from each others’ success.

So-called "trickle-down" economics is a theory that, to its utter misfortune, has been tried in practice and failed. Very little of the gains of economic growth have "trickled down" to average working people.

Thirty years ago, for example, the CEOs of major American companies took home about 25 to 30 times the wages of the typical worker. After the 1970s, the two pay scales diverged. Today, CEO pay packages are about 350 times what the typical worker earns.

When times are hard, CEOs get "golden parachutes" as goodbye gifts. Robert Nardelli, the former CEO of Home Depot, presided over a substantial drop in the firm's share price; but he left the firm with a "golden parachute" worth some $210 million. But the typical worker gets nothing when he or she is forced to leave. Indeed, unemployment insurance is available to fewer than 40 percent of people who lose their jobs.